As a means of resolving business-to-business disputes, arbitration is a high-risk strategy that has fallen into growing disfavor. Minnesota’s consensual special magistrate system is a little-known alternative with major potential advantages—not least among them, the fact that its outcomes can be appealed.

Ask most lawyers and even judges about Minnesota’s “consensual special magistrate” (CSM), and they will most likely assume that you are referring to some sort of court-appointed special master or referee. In fact, a consensual special magistrate is neither a master nor a referee, but rather a Minnesota-specific, appealable alternative to arbitration.

This article seeks to introduce both transactional and trial lawyers to the CSM. The article’s focus is on business-to-business disputes—the author’s expertise—although a CSM can determine many other types of litigation. The article: (1) explains that, at least for business lawyers, arbitration is no longer “the golden child;” (2) identifies the defects that make arbitration problematic; (3) describes the CSM process, including the underlying law; and (4) assesses how the CSM compares with arbitration.

What’s Wrong with Arbitration?

As this publication recently observed, “It’s a long-established principle that state and federal courts hold arbitration in high regard,”1 and the U.S. Supreme Court has upheld arbitration provisions even in form contracts “offered” by businesses to customers and employees.2 However, in the business-to-business context, the skies have been clouding up and more than a few discouraging words have been heard.

For example, in a 2006 column, Claude E. Ducloux, a Texas lawyer, first acknowledged that, “[w]hen arbitration became the ‘golden child’ alternative to litigation, [he] jumped on that bandwagon along with everybody else,”3 but later concluded that “arbitration is proving to be a crap shoot of ever-increasing uncertainty.”4 Today, Mr. Ducloux’s website “advises… clients to be wary of mandatory arbitration clauses in any business contract, as the benefits may well be outweighed by the dangers, including cost and uncertainty of outcome.”5

Another experienced attorney, Aaron Foldenauer, has gone well beyond that cautionary characterization. In a 2014 article in Corporate Counsel, he essentially denounced the arbitration process.6 He first marshalled some telling (albeit anecdotal) evidence:

Three recent high-profile arbitral awards highlight the risks of arbitration and demonstrate that, contrary to widespread belief, arbitration is often not cheaper, faster or more predictable than litigation…. [In an arbitration between] Amkor Technology and Tessera Technologies, Tessera was awarded $145 million. And this was on top of $64 million Amkor had already paid to Tessera in connection with a prior, related ruling…. Coffee giant Starbucks lost an arbitral award totaling $2.76 billion, including $527 million in interest and legal fees, to Kraft Foods Group Inc. in connection with a dispute related to the termination of an agreement that allowed Kraft to distribute Starbucks coffee in grocery stores.… Thus, standing alone, the award wiped out two years’ worth of Starbucks’ profits. And late last year, jeweler Tiffany lost $449.5 million, plus interest, costs and attorney fees, in an arbitral proceeding to Swatch SA concerning a failed partnership in which Swatch was to develop watches for Tiffany’s brand. Tiffany’s loss surpassed the profits it had earned during all of 2012.7

After presenting this parade of horribles, Foldenauer proceeded to question the judgment of transactional lawyers who counsel or suffer their clients to agree to business contracts calling for binding arbitration:

That risk-averse, well-represented corporations would willingly put such large sums of money in the hands of ultimately unaccountable arbitrators, whose decisions are almost always nonappealable[,] is surprising. The instinctive decision to do so should be revisited. This is particularly so given that the oft-touted benefits of arbitration—that it is cheaper, faster and more predictable than litigation—are routinely untrue in practice.8

In the eyes of its critics, arbitration suffers from the defects of its own virtues. Arbitration’s most extolled virtue—finality—implies its greatest defect. An arbitrator’s decision is essentially non-appealable.9 Even patent errors of law do not preclude the enforcement of an arbitration award,10 and a court must give great deference to an arbitrator’s determination even on matters of important public policy.11 The situation is contrary to an otherwise basic premise of our legal system. In the words of Justice Brennan, “There are few, if any, situations in our system of justice in which a single judge is given unreviewable discretion over matters concerning a person’s liberty or property….”12

The high barrier to appeal causes several related problems. First, as Lord Acton stated, “Power tends to corrupt and absolute power corrupts absolutely.”13 The corruption is not necessarily pecuniary in nature; it can lie in the belief that one’s own sense of justice suffices as the basis for decision making. As a result, arbitration lacks “any requirement that resolution follow legal precedent.”14 And, in the words of the U.S. Supreme Court, “The absence of multilayered review makes it more likely that errors will go uncorrected.”15

The virtue of finality perhaps also explains another defect: no record; not even a written explanation of the decision. Parties and the arbitrator may avoid this defect by agreement, but the norm is not to do so. Rule 114.09(d)(1) of the Minnesota General Rules of Practice states: “No record of the proceedings shall be made unless permitted by the arbitrator and agreed to by the parties.” Rule 114.09(e)(3) provides: “No findings of fact, conclusions of law, or opinions supporting an arbitrator’s decision are required.”16

This defect is problematic for three reasons. The first is a matter of intellectual discipline. “Writing,” it has been said, “is nature’s way of letting you know how sloppy your thinking is.”17 Conversely, preparing findings of fact and conclusions of law focuses the decision maker—on the facts, the law, and perhaps most importantly, the interrelationship of the two. In drafting more than 40 decisions as a CSM in a pilot project in the Second Judicial District, the author repeatedly benefitted from this intellectual discipline. Preparing findings and conclusions routinely sharpened the analysis and sometimes produced a decision substantially different from what the author had initially anticipated.

The other two problems pertain to the impact of an arbitral award on the lawyers involved and their respective clients. In the absence of a detailed explanation, neither the losing lawyer nor losing client can learn from their mistakes. More particularly, the lawyer cannot answer the client’s inevitable question: What went wrong?

What is a Consensual Special Magistrate?

According to the Minnesota Supreme Court, the Consensual Special Magistrate is: “A forum in which the parties present their positions to a neutral in the same manner as a civil lawsuit is presented to a judge. This process is binding and includes the right of appeal to the Minnesota Court of Appeals.”18

Using a CSM requires consent—from the parties and from the judge to whom the case is assigned.19 Often the judge takes the initiative to suggest a CSM, but nothing prevents the parties from proposing a CSM to the judge. Typically, parties agree to a CSM after litigation has begun, but parties to a contract can agree in advance to use a CSM in the event of litigation. Technically, using a CSM requires the acquiescence of a judge; the clerk’s office will not file a CSM’s order for judgment unless a judge has countersigned the order. However, it is unlikely that a judge assigned a complex case involving business law issues will demur from authorizing a CSM.

Once appointed, the CSM undertakes all of the functions of a judge, with virtually all the powers of judge.20 Thus, the CSM handles discovery disputes, decides pre-trial motions (including dispositive motions), presides at the trial, makes findings of fact and conclusions of law, and issues an order for judgment. While acting as CSM in the Second District, the author decided motions to dismiss, summary judgment motions, and post-trial motions for attorney’s fees; helped parties compromise their disputes; and facilitated discovery in several cases in which one party had counsel and the other was pro se.

With agreement of the parties, the CSM process can be sculpted to maximize efficiency. For example, the parties can select a CSM who promises to decide pre-trial motions according to an agreed schedule, thereby avoiding the costly inefficiency that results from dispositive motions being decided only on the eve of trial. Moreover, the parties by agreement can make certain that the decision maker is learned in the relevant areas of the law.

Arbitration and CSM Compared

The following chart compares Arbitration and CSM in seven respects.

Arbitration

Consensual
Special Magistrate

Avoid details of dispute becoming public record

Likely, unless suit to enforce award causes disclosure

Not as a matter of right, because the decision is filed with the district court26

Subject to the repeat retention problem27

Yes

Yes

Ensures that neutral has specific subject matter expertise

Possible, but recourse to traditional providers can result in an arbitrator who lacks detailed familiarity with the relevant law and business practices

Available, because to date choosing CSM—whether prospectively or not—is a case by case decision

Adheres to precedent

Typically not required; if required, likely not enforceable through judicial review28

Yes, due to right to appeal

Explains decision

Typically no29

Yes

Intellectual discipline through the writing of a detailed decision

Typically no30

Yes

Appealable

Only in the rarest
of situations

Yes

How Binding is a CSM’s Decision?

For the CSM process to work properly, the CSM’s decision must be binding not only on the parties (subject to appeal) but also on the judge assigned to the case. If the judge’s signature is not merely pro forma, the CSM is effectively demoted to the position of special master or referee. The supernumerary review costs the parties additional time and expense.

Rule 114.02(a)(2) mentions no such review. To the contrary, the rule states that a CSM functions “in the same manner as a judge” and that “[t]his process is binding” subject only to an appeal to the court of appeals.21

However, for cases venued in Ramsey or Hennepin County the situation is a bit more complicated. In 1989, the Legislature enacted Minn. Stat. §484.74, subd. 2A and began a “special magistrate” pilot project in Hennepin County.22 The next year, the Legislature added Ramsey County to the project.23 The initial legislation called for a report by July 1, 1991,24 but the deadline was pushed back several times and eventually abandoned.

Minn. Stat. §484.74, subd. 2A contemplates the district court judge being considerably more involved than within the Rule 114.02(a)(2) structure:

If the parties agree…, the presiding judge may appoint, by order,… a special magistrate. The special magistrate may preside over any pretrial and trial matters as determined by the presiding judge.…The presiding judge may adopt the rulings and findings of the special magistrate… without modification. The parties have a right to appeal from the presiding judge’s rulings and findings… as in other civil matters.

However, this provision is not the final word. The statute is not exhaustive, and the statute’s different name (omitting “consensual”) suggests that the legislatively and judicially authorized processes are distinct. Moreover, it is incredible that the Supreme Court would defer sub silentio to the Legislature on a matter pertaining to civil procedure. Thus, in Ramsey and Hennepin Counties, parties can avoid supernumerary review simply by invoking Rule 114.02(a)(2).25

The Bottom Line

On occasion, a parent responds “Because I said so” to a child who asks why a parental rule should be obeyed. That response may or may not be good parenting, but it leaves much to be desired as justification for an arbitral award. Using a consensual special magistrate solves the transparency problem, fosters decisions based on precedent, and thus provides an appealing alternative to arbitration.

A graduate of Harvard University (A.B. 1972, summa cum laude) and Yale Law School (J.D. 1979), DANIEL S. KLEINBERGER is Emeritus Professor of Law at William Mitchell College of Law in Saint Paul, MN, where he taught business law for 28 years. Since 1997, Professor Kleinberger has served as Reporter or Co-Reporter for five major projects of the Uniform Law Commission. He works regularly as a consulting and testifying expert, as a consensual special magistrate, and occasionally as an arbitrator. From 2012 to 2015, Professor Kleinberger served pro bono as a special consensual magistrate in a pilot program in Ramsey County District Court. He may be contacted through his website: danielkleinberger.com

Notes

1 LVII Bench & Bar (May/June 2015) at 3 (introducing an article in the same issue, Kevin P. Curry and George W. Soule, The Treatment of Arbitration Agreements in Minnesota Courts, id. at 20).

16 In contrast, Rule 114.02(a)(2) provides a process that proceeds “in the same manner as [with] a judge.” Cf. Minn. Stat. § 484.74, subd. 2 (2015) (referring to “the rulings and findings of the special magistrate” in CSM proceedings brought under the statute).

20 Rule 114.02(a)(2) does not mention the CSM having the power to hold a party in contempt, to compel a third party to respond to a subpoena, or to summon and empanel a jury. The power can perhaps be inferred from the statement that “the parties present their positions to a neutral in the same manner as a civil lawsuit is presented to a judge.,” id., but no case so holds. In any event, as to the first two matters, presumably the judge who appoints a CSM will be willing to exercise his or her powers in appropriate circumstances. As to third matter, consenting to a CSM under Rule 114.02(a)(2) may well waive the right to a jury. The situation is different under Minn. Stat. §484.74, subd. 2A (2015) which specifically refers to “a jury verdict.”

26 A party to a district court proceeding may ask the court to seal all or some of the record. See, e.g., Minneapolis Star & Tribune Co. v. Schumacher, 392 N.W.2d 197, 200 (Minn. 1986). The court’s power would extend to a proceeding to enforce or vacate an arbitration award as well as to the filing of a CSM decision.

27 A neutral may have a bias (unconscious or not) to curry favor with a party who can give the neutral repeat business. Matthew Bricker, “The Arbitral Judgment Rule: Using the Business Judgment Rule to Redefine Arbitral Immunity,” 92 Tex. L. Rev. 197, 221 (2013) (referring to “arbitrators who are… subtly biased in favor of the repeat users of arbitration”).

28 An agreement to arbitrate can direct the arbitrator to follow precedent, but, without a meaningful appeal right, the direction is more precatory than mandatory. Cf. State Office of State Auditor v. Minnesota Ass’n of Prof’l Employees, 504 N.W.2d 751, 755 (Minn. 1993) (stating that “[t]he scope of the arbitrators’ powers is a matter of contract to be determined from a reading of the parties’ arbitration agreement, and an arbitrators’ award will be set aside by the courts only when the objecting party meets its burden of proof that the arbitrators have clearly exceeded the powers granted to them in the arbitration agreement”) (quoting Children’s Hosp., Inc. v. Minnesota Nurses Ass’n, 265 N.W.2d 649, 652 (Minn.1978) (emphasis added by the court).

29 An agreement to arbitrate can provide for a written explanation of the award, including findings of facts and conclusions of law, but doing so runs counter to the mind set of many arbitrators. Cf. Minn. Gen. R. Prac. 114.09(e)(3) (“No findings of fact, conclusions of law, or opinions supporting an arbitrator’s decision are required.”).